Global subsea demand poised for recovery

Caitlin Shaw, Wood Mackenzie

May 1, 2017

Wood Mackenzie’s Caitlin Shaw provides perspective on the subsea market and how the industry will redefine a “good” year.

An illustration of the Mad Dog Phase 2 development in the Gulf of Mexico, which recently reached a final investment decision. Image from BP.

Wood Mackenzie’s Upstream Supply Chain team has observed the global subsea market weathering three years of severely depressed subsea and deepwater demand activity due to cost concerns and a crash in the oil price. After years of collaboration, project re-assessment and cost discipline, 2017 is poised to start the next up cycle in subsea. Last year saw a record low level in subsea tree awards and 2017 could almost double that demand based on award opportunities in all major deepwater basins around the world.

While the profile of subsea projects going forward is likely to look different from what we have seen historically – smaller, more compact and efficient concepts – growth in 2017 is expected from the sub-80 subsea tree demand level of 2016. This is due in part to a higher expected oil price in 2017 than 2016, but has as much to do with the work that has been put into this current wave of developments in the pipeline. Operators have reduced the scope, changed the development scenario and standardized where possible to bring their project breakeven economics more in line with expected oil prices going forward.


Redefining “good”

The ever-present question of when demand will be “good” again cannot be ignored and recently the answer comes along the lines that “good” may have to be redefined based on a new chapter for the subsea industry. Wood Mackenzie’s subsea tree award forecast does not portend a recovery to pre-2014 record levels for many reasons. The oil price just will not be what it once was and although that is disheartening to many, the industry is nothing if not innovative and will continue to adapt to this as they have in the past. Capacity has been reduced, if at no other level than head count, and continues to be right-sized as long as demand stays low. Even when backlogs build and the need for additional resources arrives, there will remain a lag in seasoned, highly efficient workers to fill in, which will add to lead times going forward. Good may not be a 500 subsea tree year – good may be closer to 250-300 within our forecast period.

Shell’s Olympus and Mars platform in the Gulf of Mexico in 2013. Kaikias in the prolific Mars-Ursa basin 130mi offshore Louisiana. Photo from Shell.

Working together to work through the downcycle

The current downcycle that the industry is working hard to transition out of, started materially affecting subsea demand in 2014 as operators became concerned enough with the cost of developing their subsea and deepwater fields that they severely halted project executions. There had been telltale signs of discontent among the operators with respect to development cost seen in re-bidding efforts for floating production systems (i.e. Chevron’s Rosebank in 2013) and ongoing stalls in project execution of large, complex projects. The oil price drop at the end of 2014 exacerbated this trend and highlighted the dependency of most subsea and deepwater projects on a breakeven price north of US$70/bbl – a breakeven which was no longer sustainable.

The theme of the past two years in the offshore industry has been collaboration. The operators have been collaborating with the supply chain and working to bring them into the conversation earlier in a project’s life cycle. The supply chain itself has been collaborating and consolidating to provide innovative solutions to the operators by creating efficiencies via avenues including enhanced vertical integration. The upper echelon of the subsea supply chain has seen the major OEMs pair off with the leaders in the marine construction market and work together to increase efficiencies throughout the entire life cycle of the project. This collaborative work has been focused, for the most part, on one main end goal – to reduce overall cost by increasing efficiencies and return on investment.

An illustration of the Kaikias subsea infrastructure, a Gulf of Mexico project in which Shell recently announced a final investment decision. Image from Shell.

Subsea remains viable

This joint work over the past 24 months to bring down development costs, increase efficiencies and reduce cycle time may be on the verge of being realized. Oil companies are working towards commercial solutions for executing their subsea developments in a lower oil price environment. Through efficient well concepts, right-sizing development scenarios and standardization, among other solutions, breakeven prices are now being discussed at $40-50/bbl instead of $70+/bbl. While the flood gates will not be opened just yet, the cautious optimism discussed around the reality of re-working global subsea fields to be economic under the current oil price outlook, increases confidence of a demand recovery in the coming years.

It is also important to keep in mind that not all subsea projects are created equal. Macro market conditions, commodity prices and geopolitical issues affect operators and projects differently and that is accounted for in the forecast outlook. We understand that natural gas projects for local supply represent a different momentum than those supplying into the global market. We also recognize that certain projects and certain operators are faster to adjust to the lower oil price and still prioritize execution of projects with an eye to longer-term oil price potentials.


The supplier landscape


In terms of subsea production systems, TechnipFMC and OneSubsea have been the market leaders over the past few decades. They have long-established relationships with some of the leading operators in deepwater around the world. GE Oil & Gas, Aker Solutions and Dril-Quip play critical roles in various market segments within the subsea supply chain. Along with full subsea production systems, Aker Solutions and GE Oil & Gas participate heavily in the subsea controls market with a lot of demand from projects where the equipment is allocated over more than one supplier as well as the aftermarket demand for replacement control units. Dril-Quip and GE Oil & Gas are the main providers of global subsea wellheads commonly providing this equipment into other suppliers’ systems.

For operators with established frame agreements or preferred supplier relationships, some appear to be reaching beyond these traditional suppliers to look for additional ways of cutting cost. This trend could upset the near-term market share trend as competition remains tight while backlogs remain low. Whether this potential disruption would last long enough to statistically change supplier relationships is yet to be known, but the successful track record of TechnipFMC and OneSubsea would be difficult to permanently re-route.

Opportunities rising to the surface

While not the triple digit oil prices of years ago, the industry is getting more comfortable with a stable oil price between $50-60/bbl. Oil companies and the supply chain have been hard at work re-engineering how subsea is developed and executed and have had positive results in the form of lower publicized breakeven prices. While this will not get us back to pre-2014 subsea tree demand levels, it does provide strength behind an improving award scenario for 2017 and 2018. Projects are being re-worked, priorities are being re-evaluated and enabling technologies are being applied to reduce inefficiencies, reduce cycle time and bring down cost. While these solutions may not work for all projects in the near-term, it will mean something to the core of subsea demand and the operators and supply chain members involved.

Caitlin Shaw is Wood Mackenzie’s research director – Upstream Supply Chain. She graduated from Texas A&M University-Galveston in 2003 with a BS in marine biology. Prior to Wood Mackezie, Shaw was senior director of market research and the data division at Quest Offshore Resources.